We presented Charles & Colvard (CTHR)
in November 2010 as a company that could be a home run or a strikeout, depending
on whether consumers would accept jewelry made from moissanite (silicon carbide)
as an affordable luxury.

There's no doubt diamonds are best. But diamonds are expensive. Hence, many
have shown themselves willing to step down to lesser categories, such as
zirconium. This is where CTHR competes.

Back in 2010, the economy had just fallen off a cliff, and the merits of
jewelry made from a substance nobody heard of ranked as low as anything could
rank among consumer priorities. As a result, CTHR's annual sales, which peaked
at $44 million in 2005, plummeted to a mere $8.3 million by 2009.

However, the company survived, thanks to vigorous cost-cutting and to its
having had a healthy cash position and no debt. And while the economy today can
hardly be considered hot, but we have been climbing back and consumers are more
open to luxuries than they were a few years ago.

CTHR still has a long way to go to establish moissanite, but it is now back
in the game. Sales were $16 million in 2011 and $21.5 million in the 12 months
ended September 30. The company is now solidly in the black, having generated
net income of $1.6 million in 2011 and $2.1 million in the 12 months ended
September 30.

Going forward, one important issue is based on the merits of moissanite. This
seems like a plus for CTHR. The Gemological Institute of America data pegs
moissanite as having:

a refractive index (brilliance, or the tendency to reflect light) of 2.65
to 2.69, versus 2.42 for diamond and 2.17 for zirconium;

0.104 for regard to dispersion (breaking of light rays into spectral
colors) versus 0.044 for diamond and 0.06 for zirconium;

and 20.4% for luster (the amount of light that is reflected back to the
observer from the surface of the stone), versus 17.2% and 13.6% respectively
for diamond and zirconium.

This doesn't assure success. Consumers buy what they like, not necessarily
what the numbers say they should like. But the moissanite numbers, while not at
diamond levels, indicate that the company has something to work with as it tries
to get consumers to like it.

With the worst of the economic crisis now in the past, CTHR has been focusing
more on distribution. Traditionally, it relied on wholesaling basic gemstones
that would eventually reach consumers via retail jewelry chains. That business
model is still there, and it's been enhanced by the introduction of finished
jewelry featuring moissanite in 2010 and in the ramping up of green gemstones in
2011.

Also, CTHR has started to pursue direct-to-consumer efforts, which have
quickly grown to about 30% of sales. In August 2011, CTHR introduced a revamped
e-commerce Web site. In mid-2011, the company started to develop a
direct-to-consumer home party sales model based on the Lulu Avenue brand, which
will be enhanced by a deal calling for custom-designed jewelry by JudeFrances.

Television shopping networks, including ShopNBC and JewelryTV in the US, were
first used by CTHR in 2010 and have been particularly fruitful thus far. As to
retailing, CTHR sells finished jewelry to select retailers that don't conflict
with the wholesale loose-gem distribution network, and is assessing the
feasibility of developing its own franchised stores.

While this story is far from complete, the home-run scenario seems far more
probable today than was the case in when we first looked at CTHR in 2010. The
market agrees, as indicated by the trailing 12-month price-to-sales ratio of
3.55, which indicates the Street is looking for strong growth.